Securities Law and Regulation

Market Regulation under the Companies

Act,1956

The Companies Act was the earliest enactment that has

regulatory provisions in the issuing of shares and
securities by the company.
It has provisions relating to issue, allotment and
transfer of securities and the necessary disclosures to
be made while making a public issue. The disclosures
to be made in Prospectus
It also has provisions relating to securities market.
It regulates the entire process of allotment of shares
and issuing of share certificates.
SC(R)A
The Securities Contracts (Regulations) Act,1956 was one of the
special legislations enacted to regulate the securities market.
It was passed after the recommendations of the A D Gorwalla
Committee after the draft was circulated to the principal stock
exchanges, chamber of commerce and other interested
associations.
After considering all the comments and suggestions, the Act was
enacted in 1957.
According to the Act, Securities means and includes a) shares,
scrip, stocks, bonds, debentures, debenture stock or other
marketable securities of alike nature in or of any incorporated
company or any other body corporate; b) government securities; c)
such other instruments as may be declared by the Central
Government to be securities and d) rights and interests in
securities.
Objectives of the Act

To prevent undesirable transactions in securities by regulating the

business of dealing therein by providing for certain other matters
connected therewith.
Every stock exchange to obtain recognition from the Central
Government through an application.
The Securities Laws ( Second Amendment) Act, 1999 has empowered
the SEBI also to grant recognition to stock exchanges.
The Act has prescribed the conditions for listing of securities with
recognized stock exchanges, which has been made mandatory under
the Companies Act.
Regulatory Measures
The Act confers powers on the Central Government to make rules
To call for periodical returns to be furnished by the stock exchanges
To order suppressions of the governing body of a recognized stock
exchanges
To suspend the business of any recognized stock exchange, if it thinks
fit to do so.
To declare contracts for sale or purchase of any security in certain
cases.
The Act requires the dealers in securities, operating in areas to be
notified by SEBI for this purpose
To obtain license from SEBI in order to regulate their dealings in
securities.
The SERA

To Act is made to keep a watch on all the stock exchanges of India and
various transactions in securities.
The Central Govt to make rules by notification in the official gazette to
govern and regulate the functioning of the stock exchanges in India.
Based on it, the Central Government framed the Securities Contracts
(Regulation) Rules in the year 1957.
Role of SEBI

The primary and secondary markets have grown in large number for the
raising of the capital.
The number of stock exchanges (24),intermediatories, and other
institutions have grown to a large extent making it obligatory for the
State to control and regulate these markets for the protection of the
investor population.
In order to achieve this the State has empowered SEBI to bring
quantitative and qualitative changes in the nature of securities market.

Cont..
Role of SEBI
It was set up by the Government of India in 1988 as a non-statutory
body to promote the growth of the securities market and also to protect
the investors interest. It is now usually referred as Board.
Though in the beginning it was given the status of an interim body under
the administrative control of the Ministry of Finance later, it was
constituted through the Securities and Exchange Board of India Act,
1992 as a statutory body.
At present, both SERA and SEBI govern the securities market.
Objectives of SEBI

To promote fair dealings by the issuers of securities and ensure a

market place where they can raise funds at a relatively low cost.
It has to have an effective surveillance mechanism and to regulate it
for promoting market efficiency.
To protect the investors interest and safeguard their rights and
related interests so that there is a steady flow of savings into the
market.
To regulate and develop code of conduct and fair practices among
intermediatories with a view to make them more competitive and
professional. The intermediatories are like the brokers, merchant
bankers etc
In order to achieve these objectives, SEBI can frame regulations.
Other roles of SEBI

It seeks to accomplish the regulation and development of the Securities

market by continual review and appraisal of its policies and programs.
It is the Apex authority to regulate the transactions in the Indian
Securities market.
In order to regulate the market, the Act has made it compulsory for the
intermediatories to register with SEBI.
It monitors the functioning, code of conduct, capital adequacy and other
norms including inspecting their operations so as to effectively enforce
its compliance.
Other functions of SEBI

SEBI has committed portfolio investment only through broad based

funds such as mutual Funds and others.
SEBI even manages to look into the affairs of the Foreign Institutional
Investment, which has been a major development these days.
The SEBI needs to look into foreign investments because, foreign
participation has been permitted in various areas of financial services,
through Joint Ventures with the approval of the Foreign Investment
Promotion Board (FIPB).
Powers of SEBI
SEBI vested with the powers of CIVIL COURT as per CPC
The Powers include:
Discovery and production of any books of accounts and other
documents including inspection of these books of accounts, registers
and other documents etc
Even to inspect the books, register etc of companies which want to get
its securities listed in the stock exchange, in order check as to any
insider trading or fraudulent and unfair trade practices related to the
securities market.
Summoning and enforcing the attendance of persons and examining
them on oath.
Issuing commission for the examination of witness or documents.

Cont
Other powers
During investigation or pending any enquiry, it can suspend trading in
stock exchanges, restrain persons to access the securities market,
suspend any office bearer of stock exchange or self-regulatory
authority
Impend, retain any proceeds of any transactions
Attach bank account etc..
Issue directions to the security market not to dispose of or alienate an
asset forming part of any transactions under investigation.
To protect investors , SEBI may specify some special regulations or
orders in respect to prospectus, offer documents and advertisements
that are offered to solicit money from the investors.
It can also specify certain requirements for listing of securities and
transfer of securities.
It can levy fees, levy penalty, hear appeals etc..
It can suspend or cancel the registration of any intermediatory
Stock Exchanges
To sell and purchase shares, securities, stock and other financial
products the centralized market place is the stock exchanges. The
recognized stock exchanges in India are about 24 in number. The
members may act either as agents for their customers, or as principals
for their own accounts.
Stock exchanges facilitates for the issue and redemption of securities
and other financial instruments including the payment of income and
dividends.
The Indian Stock Exchanges are:
BSE- It is the principal Stock Exchange, traced back to the history of
establishing around 1875 in Mumbai as an Non-profit Organization.
NSE- It has been established as a Public Limited Company. They are
the main Stock Exchanges other than the Regional Stock Exchanges (
List of RSE in next slide)
Regulation of Stock Exchanges

The nominations to the post of president and the vice president of the
stock exchanges and appointment of the executive chiefs and other
nominations of public representatives on the governing body of stock
Exchanges are with the Ministry of Finance as per the rules, bye-laws,
and regulations of the Stock Exchanges.
SEBI regulates the Stock Exchanges, securities markets, registration
and regulations of intermediatories, including the regulations of mutual
funds, prohibition of fraudulent and unfair practices and insider dealings.
As per SERA, SEBI can call for periodical and annual returns from stock
exchanges, amendments to rules and bye-laws of the stock exchanges,
licensing of dealers in securities and suspension of business of any
recognized stock exchanges.
The delegation of powers to SEBI

The Central Government has delegated the following

powers to the SEBI under the SC(R)A,1956:
Submission of applications for recognition of stock exchanges
Granting and withdrawal of recognition of stock exchanges
To amend rules and articles of association of SE relating to voting rights
etc..
Regulation and control of business of dealing in spot delivery contracts
Hearing appeals submitted by companies against refusal of stock
exchanges to list their securities.
The governing body has been empowered to deal with admissions,
registration and expulsion of members, adjudication and imposition of
penalties on members and regulation of the market etc
Powers of SEBI over Stock Exchanges

SEBI to direct the stock exchanges to make or amend rules if necessary

. The rules so made to be published in the official gazette.
SEBI to declare the lawfulness of contracts in a specified state or area
and prohibit contracts as a principal with any other person other than a
member of the recognized stock exchange.
To prevent undesirable speculation in specified securities in any State
or area as per the notification in the official gazette. SEBI may grant
license for dealing in securities if it is satisfied with the manner in which
securities are dealt.
SEBI to act in the interest of trade and public and regulate and control
business of dealing in spot delivery contracts. No person to organize or
assist in organizing or be a member of any stock exchange without
permission of SEBI